A special case of the arbitrage pricing theory that is derived from the one-factor model by using diversification and arbitrage. It shows that the expected return on any risky asset is a linear function of a single factor.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
Arbitrage Pricing Theory
A pricing model that seeks to calculate the appropriate price of an asset while taking into account systemic risks common across a class of assets. The APT describes a relationship between a single asset and a portfolio that considers many different macroeconomic variables. Any security with a price different from the one predicted by the model is considered mispriced and is an arbitrage opportunity. An investor may use the arbitrage pricing theory to find undervalued securities and assets and take advantage of them. The APT is considered an alternative to the capital asset pricing model.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved